Wednesday, March 12, 2008

I knew it was all Jimmy Carter's fault . . .

. . . that we've apparently been in a recession since 1975.

According to Mid-Atlantic States Labor, The American quality of life has been going downhill since 1975.

Arguing that Gross Domestic Product (GDP) is not "is not an appropriate gauge of our national well-being" is not a particularly new proposition, although you should feel a slight tinge of warning at that "national well-being" term being thrown into the mix.

Let's take a look at how the analysis goes:

GDP measures the total market value of all goods and services produced in a country in a given period. But it includes only those goods and services traded for money. It also adds everything together, without discerning desirable, well-being-enhancing economic activity from undesirable, well-being-reducing activity. An oil spill, for example, increases GDP because someone has to clean it up, but it obviously detracts from well-being. More crime, more sickness, more war, more pollution, more fires, storms and pestilence are all potentially positives for the GDP because they can spur an increase in economic activity.

GDP also ignores activity that may enhance well-being but is outside the market. The unpaid work of parents caring for their children at home doesn’t show up in GDP, but if they decide to work outside the home and pay for child care, GDP suddenly increases. And even though $1 in income means a lot more to the poor than to the rich, GDP takes no account of income distribution.

In short, GDP was never intended to be a measure of citizens’ welfare — and it functions poorly as such. Yet it is used as a surrogate appraisal of national well-being in far too many circumstances.

The oil spill, however, is an example of the famous broken window fallacy explained by economist Henry Hazlitt:

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sun. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Thus the statement that "An oil spill, for example, increases GDP because someone has to clean it up, but it obviously detracts from well-being," is not necessarily or even probably correct, because the cost of the clean-up may create some new economic activity, but that is inevitably at the opportunity cost of all the things that would have been purchased with those funds, as well as the capital loss of all the oil that was spilled, both to the oil company and those who will pay higher prices for their next load of fuel.

So, problem one with this analysis: oil spills and other disasters do not increase the GDP (think Katrina here).

Next, it is argued, "GDP also ignores activity that may enhance well-being but is outside the market. The unpaid work of parents caring for their children at home doesn’t show up in GDP, but if they decide to work outside the home and pay for child care, GDP suddenly increases. "

Again, please note that well-being has yet to be defined; also note the implicit assumption that families with two working parents are automatically a detractor to well-being, presumably because that author assumes that mothers would never work outside the home other than due to dire economic need. Nor does the example capture why the GDP goes up when a second parent goes to work. Think of it this way: a day-care center provides services to forty families, employing six workers. Which creates the most impact on raising the GDP: the six day-care workers or the other forty workers? Moreover, in single-parent households, the availability of day-care allows that parent to support his/her family and contribute to the rise in the GDP.

To argue therefore that more parents sending their children to day-care does not enhance societal well-being (recalling the quality of life going downhill thesis advanced earlier) therefore requires one to, what, attribute the rise in single-parent to the economy and not to cultural changes (or even the intrusive dynamics of the welfare state that encourage the flight of fathers from poor urban families)?

In other words, it's pretty clear that the author is making a very (very!) white, middle-class-centric argument regarding well-being. Even when we don't define them, the way we use terms tends to define them.

But there's more: This statement--"And even though $1 in income means a lot more to the poor than to the rich, GDP takes no account of income distribution"--suggests that there is somewhere an optimum income distribution within a society that we are somehow morally obligated to strive toward. It would be intellectually more honest for the author to come clean with exactly what model is being touted here, but don't look for that to happen, because if you actually specified the assumptions you're using you could be questioned about them. Vagueness allows you to criticize the GDP model and by implication pillory the rich without having to define your terms.

Moving from there, the author briefly discusses a number of what you might call "values-added" economic models, even admitting that they "are not perfect and need more research and refinement," but that nonetheless (for reasons that are never specified) "they are much better approximations to a measure of true national well-being." The chosen representative model is the so-called Genuine Progress Indicator:

The formula for calculating GPI, for instance, starts with personal consumption expenditures, a major component of GDP, but makes several crucial adjustments. First, it accounts for income distribution. It then adds positive contributions that GDP ignores, such as the value of household and volunteer work. Finally, it subtracts things that are well-being-reducing, such as the loss of leisure time and the costs of crime, commuting and pollution.

Unpacking this one is really fun, because you have to read very carefully. The most interesting observation revolves around the type of society this model appears to prefer: a low-pollution society in which people don't have to work very many hours, live close to their jobs in crime-free neighborhoods in two-parent families that don't use day-care and pretty much everybody makes the same amount of money.

Sort of reminds you of Happy Days, doesn't it?

The resemblance isn't accidental, for it is the 1950s that this model is apparently nostalgic for:

While the U.S. GDP has steadily increased since 1950 (with the occasional recession), GPI peaked about 1975 and has been relatively flat or declining ever since. That’s consistent with life-satisfaction surveys, which also show flat or dropping scores over the last several decades.

Ironically, the social message of this periodization is that societal well-being was evidently higher (a) in the period of segregated schools and (b) did not long survive the introduction of the welfare state. Probably not what the author intended.

[It should also be noted that the DPI therefore increased throughout the Nixon era and started its downward spiral under Jimmy Carter. Ooops.]

Laying that aside, what does the author think should be done? Here goes:

How can we get out of this 33-year downturn in quality of life? Several policies have been suggested that might be thought of as a national quality-of-life stimulus package.

To start, the U.S. needs to make national well-being — not increased GDP — its primary policy goal, funding efforts to better measure and report it. There’s already been some movement in this direction around the world. Bhutan, for example, recently made “gross national happiness” its explicit policy goal. Canada is developing an Index of Well-being, and the Australian Treasury considers increasing “real well-being,” rather than mere GDP, its primary goal.

Once Americans’ well-being becomes the basis for measuring our success, other reforms should follow. We should tax bads (carbon emissions, depletion of natural resources) rather than goods (labor, savings, investment). We should recognize the negative effects of growing income disparities and take steps to address them.

International trade also will have to be reformed so that environmental protection, labor rights and democratic self-determination are not subjugated to the blind pursuit of increased GDP.

First let me say that I'm behind Bhutan--who couldn't love a term like gross national happiness (picture a smiling fat guy with a beer watching American Idol)?

Aside from that, this pseudo-analysis turns out in the end to be nothing more than a poorly conceived shil for (a) more taxes for social engineering based on a rather simplistic view of how society should function and (b) a call for massive transfers of wealth just because income disparities are obviously a bad, baaaad thing, and the concentration of capital is never generative of good things.

What's left out: the US transition from a heavy industrial to a post-industrial, tech-based economy; the impact of the world economy and globalization on our economy; the effects of the existing welfare state; the gains of women in terms of access to both the workplace and political power; and many, many other factors....

The so-called Genuine Progress Indicator is NOT a term of legitimate economic analysis--it's an ideologically based social critique masquerading as quantitative data, designed not to be descriptive but to drive a particular high-tax, Statist, forced redistribution of wealth social engineering strategy.

Why am I not surprised?


Delaware Watch said...

"also note the implicit assumption that families with two working parents are automatically a detractor to well-being, presumably because that author assumes that mothers would never work outside the home other than due to dire economic need."

Now I'm pissed. That is a disgusting cheap shot.

There is absolutely no suggestion that families w/ two parents working detract from well being.

The argument couldn't be made more evident. The argument is that the uncompensated labor of a parent who doesn't work but stays home w/ his or her child provides a service that promotes well being which SHOULD ALSO BE COUNTED toward the GDP. There is NO suggestion that one is better than the other. That's YOUR ASSUMPTION about the argument that allows you to make the cheap shot.

Your cheap shot is not unlike how, of all the tags you placed at the end of your post, the tag "progressive politics" appears just that way: in quotation marks.

Your contempt for progressive politics is so consuming that you can't even resist making a slur about it in a freaking tag.

You can go to my site and never see the tag libertarianism in quotation marks even though I don't see much liberty coming from libertarians whose idea often seems to be to supplant perceived governmental coercion w/ private work place coercion.

"The so-called Genuine Progress Indicator is NOT a term of legitimate economic analysis--"

It's amazing how much uncritical reliance on conventional thinking is required to make such an ex cathedra pronouncement. It's also false as a matter of fact since some nations are beginning to use this measure:

Should someone conclude that because that's not how we do it in the USA, it's invalid according to you? Or is it that because your preferred economists would use a such a measure, it must have no validity?

Should someone simply pronounce about you "Ah, as we can see, he clearly thinks that only his provincial and ideological economic measures have conventional legitimacy?

Sorry to be so direct but that one really pissed me off. I think it's unfair and beneath you.

Steve Newton said...

(Your first comment somehow attached itself to another post)

Sorry you saw it as a cheap shot, but I disagree, although you're right about "Progressive Politics" in quotes. I did that at one point for a specific satiric reason on a post two months ago and I shouldn't have used it that way (I will fix it if I can edit the tag without taking the post down).

"There is NO suggestion that one is better than the other. That's YOUR ASSUMPTION about the argument that allows you to make the cheap shot."

Here's where we legitimately disagree: I read the article and I perceive the author as having exactly that agenda. The author stresses "Well-being" but instead of honestly coming out and defining it, dances around it with a whole bunch of implications that are artfully done so that one can do exactly what you've done--deny any specific charge. I think that's intellectually dishonest. Did I go as far overboard in the other direction in pointing that out: guilty as charged. That's the point I was trying to make.

(By the way, the author wasn't, as I understand it, making the point that work like home childcare should be measured in GDP, but that it should be measured in some larger accounting of social well-being.)

GPI is NOT an economic measure; yes I read Wikipedia and even the reference from whatever the institute was that created it. It is a measure of social progress that uses economic data selected as socially relevant. Here's the difference: GDP is a purely economically descriptive term that is (I agree with the author) often misused as if it were somehow a measure of social well-being. If used correctly it is simply an indicator of base economic output averaged per capita for gross comparison purposes to determine the general wealth of countries. It is not and was never intended to be a social indicator though people often misuse it.

GPI and similar indicators are designed to record progress or the lack of it toward a specific social goal: therefore the premises on which it is based have to be open for debate. This article starts with the bold assertion that life has been getting worse since 1975 based on the GPI. That's such a patently simplistic statement as to be worthless.

Let's take one example of the loaded terms used in GPI: commuting time is counted as a negative. Really? Who got to decide how much of a commute was a negative? Does the model factor in my choice that a better neighborhood to raise my children (or a better school district) might be half an hour further from my workplace and thereby be something not only that I choose but that is an economic/social positive because it increases the chances of my children doing well in life at the exchange of five hours of commuting time per week that I am willing to put in?

What you don't talk about is the fact that the author (and the creators of the GPI) fully intend for the measure to be used to drive tax policy to reinforce "good" behavior and de-incentivize "bad" behavior based on these implicit assumptions, and that they also intend to use it for forced redistribution of wealth.

Yes, I know we are on completely different sides of these two issues. But I still think that this author was either (a) hopelessly sloppy or (b) intentionally misleading about the underlying assumptions.

Likewise I think the societal critique involved in the GPI is incredibly shallow. It does make an implicit value judgment about two parents working outside the home, and it does ignore the impact of world economics (fuel prices) on the American economy. It also fails to explain the social paradox that apparently our lifestyle has been slipping away (since it peaked in 1975) within a decade of (a) desegregation of schools, (b) the advent of the Great Society welfare policies, and (c) the end of the Vietnam War. Nor can you blame this slippage (at least the start) on Reaganomics, since it clearly marks the decline as starting in the last year of the Ford administration and the beginning of the Carter administration.

(Oh, yeah, now I remember your point from the other comment: the oil spill thing. I think you missed the point: oil spills and other disasters do not cause GDP to go up, even though the economic activity to remediate them is included in the GDP. This is because the GDP would in fact have gone up significantly MORE without the disaster.

But it is legitimate to count economic activity that results from the disaster in GDP. An example: my brother-in-law's company has had him down in the Gulf cleaning up after Katrina now for several years. The extra work has allowed him to purchase a new house and retire most of his previous debts. While Katrina in wiping out an entire American city is certainly an economic and social disaster of the worst magnitude, you still cannot justify omitting his increase in economic good fortune--and that of others like him--in the general calculation of what's happening. Yet that's what the author seems to be arguing.)

In short (OK maybe this wasn't short), my primary points are:

1) You're right about the quotation marks. Sorry.

2) I stand by my belief that the author is peddling a whole bunch of implicit assumptions under "well-being" that are not dealt with honestly in the argument.

3) The "other countries do it so you can't criticize it" type argument is not valid. I really don't care if Bhutan, Austria, and Australia do it. Other countries (democracies) also have laws forcing people to vote or face civil penalties and I think that's BS too. Who gets to pick the countries used for comparison, and--again we're back to it--who gets to decide whether that usage is good for us.

4) I stand by the assertion that GPI is NOT an economic measure, but a social measure employing economic indicators. That's precisely the point of the article.